AusFinance Gazette

Are knock-down, rebuild properties worth the investment?

In the immortal words of Chumbawamba, “I get knocked down, but I get up again.” Encouraging words in the context of a night at the pub, but when it comes to property, is it such a good idea?

While knock-down, re-builds can prove profitable, it’s worth weighing the pros and cons before you bite off more than you can chew—or, as the aforementioned poets of the late nineties put it, end up “pissing the night away, singing songs that remind you of the better times.”

At the time of writing, there are some 339 ‘Knock Down’ properties listed on the market in NSW, each touting ‘remarkable opportunity and potential’ to bag a bargain at a rock bottom price before rebuilding. Active investors might see this as a chance to make significant gains, but if you’re a passive investor, it’s best to put that tractor in reverse and reassess.

Another issue to consider, especially if you’re inexperienced in the property industry, is the current state of the building sector. According to the latest ASIC insolvency statistics, the construction industry in NSW recorded 981 corporate failures for the financial year to June 30, 2023–a 91% increase from the same time the previous year. Australian-wide, 2,117 building companies went into liquidation in the 2022-2023 financial year.

Building material costs, interest rates, inflation, supply-chain issues, weather delays, labour shortages, and slow approvals rates have all contributed to the construction industry collapse.

Inexperienced property investors could find themselves in a world of hurt if they’re not equipped to handle these potential hurdles. On the flip side, if you’re a seasoned shopper and have ensured you’re knocking down and rebuilding in a desired location with high demand, you could be bulldozing all the way to the bank.

Not only do you avoid additional expenses like stamp duty and buying and selling costs when taking the knock down, rebuild route, you can also steer clear of unforeseen renovation costs which can be unpredictable and blow out budgets considerably, especially in older homes.

Building an old home, demolishing it and replacing it with a higher quality one in a prime postcode with close proximity to amenities will almost always reap high returns. In these areas, there are always buyers willing to pay more for a better home in a desired location, meaning you can charge higher rent for a new home on the property.

Another pro of knocking down and rebuilding is that while you’re awaiting plans to be drawn and building approvals to be given, you can still earn rental income from tenants, providing the property is fit to live in. Essentially, you’re getting extra help with the mortgage for the same amount you spent on the land.

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While that all sounds enticing, there are costs outside of the monetary kind worth considering. The cost of your time, emotional stresses, and if you’re in a place to manage the uncertainty of the investment is all worth wondering before you tear down and build up.

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